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Working Paper Summaries (WP/93/1 - WP/93/54)
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Summary of WP/93/12: “Auctions: Theory and Possible Applications to Economies in Transition”

Author(s):
International Monetary Fund
Published Date:
August 1993
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A major effort is taking place in many parts of the world to establish and improve market-oriented institutions. This development is particularly evident in the context of the transforming economies in Eastern Europe and the states of the former Soviet Union. Auction mechanisms are useful as one way of guiding price determination and the allocation process in a market-oriented setting. Indeed, introducing auction techniques for various commodities and assets can be used to help acclimate economic agents to operate in a world of market-determined and changing prices.

One of the main goals of this paper is to survey the extensive literature on auctions in order to shed some light on the advantages and disadvantages of various auction techniques. A second goal is to assess the application of alternative auction techniques to four specific assets, namely, government securities, refinance credit, foreign exchange, and state assets in the context of privatization. In the process, the paper explains basic auction formats and tries to clarify some of the confusion that can arise because of the differing terminology applied to these formats.

The paper concludes that auctions offer advantages of simplicity in determining market-clearing prices where markets may otherwise not exist and in allocating the auctioned items efficiently. The appropriate choice of auction format is less clear. This ambiguity stems in part from the difficulties in applying the theoretical literature to real world settings, and in part from the importance of individual country circumstances. When all is said and done, there are no unambiguous answers to the question of what is the best auction technique to use. This paper has tried, however, to rank the various auction formats according to their appropriateness in different circumstances.

On balance, uniform second-price auctions are the preferred technique. They are simpler, perform well in terms of the expected revenue to sellers, and may offer considerable gains in promoting economic efficiency. In some circumstances, the English, ascending-price auction is more favorable but, at the same time, may be difficult to use because of technical considerations. English auctions are also more prone to collusive behavior. Discriminatory auctions would tend to be appropriate only in cases where collusion was considered to be a problem. The paper describes the advantages of double auctions in the case of foreign exchange. It emphasizes that irrespective of the choice of auction technique, every effort needs to be made to ensure that auctions are run on a competitive basis with safeguards against monopoly positions.

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